Most litigation settles. The vast majority. While it would be oversimplifying things to say that it's all about the bottom line in most cases, it is mostly about the bottom line in most cases.
Truthfully, most litigation involves some level of personal emotion. We're all people, and even with corporations there are still people involved. People feel wronged. A plaintiff feels wronged and wants to go to Court to have that wrong righted. A defendant feels wronged and wants to avoid paying out anything to the plaintiff simply on principle.
Occasionally, there's merit to fighting on principle. When you deal with large numbers of people in similar capacities, you fight individual cases to send the message to everyone else. An employer who dismisses a bad actor wants to fight the wrongful dismissal claim because it doesn't want other employees thinking that acting up and getting themselves fired is an easy way to a big payout. An insurer fights wherever it can so that people don't start getting the impression that it's easy meat. Or sometimes there is simply enough money at stake to make it worth fighting regardless of legal fees.
But for most folks, it's simply a matter of moral outrage. And in most cases, that moral outrage can be quelled pretty quickly by a couple of interim accounts from lawyers. I like to give interim accounts before getting settlement instructions for exactly that reason: I want my client to have a full understanding of exactly how much the litigation has cost to date, so that they may also get a sense of how much more is riding on the line in terms of legal fees. Makes them ponder just how much their moral outrage is worth to them. Matters settle because litigants finally realize that it's too expensive to move forward for the value of the litigation.
Of the cases that actually need to go before a Court, however, it is astonishing just how many of them are family cases. Separation or divorce situations, support and equalization, custody and access. Or alternatively estate litigation as between family members. You get into estate matters with several law firms involved, and suddenly you have 4 lawyers charging $250 an hour each, spending half a day fighting over a chattel worth three hundred bucks. In what universe is that rational?
Perhaps the worse part is that it all comes out of the same pot at the end of the day. In family law, you deplete your resources and your spouse's resources: Bye bye kids' college fund. In estate litigation, it's quite common for the costs of litigation to be paid out of the estate. So you have an estate worth $250,000, and you have four people trying to split it more favourably for them...legal fees may well eat up the whole estate.
A dose of rational "bottom line thinking" would do these folks a world of wonder. But sometimes there's just too much animosity between the family members, that they'd rather divide up the whole pot between the lawyers rather than amongst themselves. It's really quite tragic.
*****
This Blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.
Showing posts with label estate administration. Show all posts
Showing posts with label estate administration. Show all posts
Wednesday, May 5, 2010
Saturday, April 24, 2010
How Not to Save on Probate
On death, if you have to get probate for a will, you will pay probate fees - basically, a tax - on the value of the Estate. Normally, you're looking at half a percent on the first $50,000 and 1.5% on everything thereafter. So on any estate of any reasonable size, you're looking at thousands of dollars.
There are ways of reducing or eliminating that tax, but are to be approached with caution.
First of all, not all wills need to be probated. Some institutions will allow you to deal with assets of up to a certain value without the need for probate. (For example, each bank will have it's own cap, but for accounts under a specified amount, they will deal with the estate trustee on the basis of the will and an indemnity.) If you don't have any assets in your estate that require probate, then you don't need to probate the will and don't need to pay any probate tax.
However, if you have even one asset in a will that requires probate, all the assets to be distributed under the will are subject to probate tax.
One way of dealing with this is to create multiple wills: One for assets that won't require probate and one for assets that might. You need a lawyer for this: If framed improperly, you might end up with the second will actually revoking the first. Thus, the cost of actually making the multiple wills means that you have to really ask whether or not your savings on probate will be worthwhile; it depends on the value of the non-probate assets in the estate.
Next thing to consider in estate planning: Insurance plans with designated beneficiaries never become part of the estate. These are really helpful for the beneficiaries: The amounts aren't subject to probate, but furthermore they aren't subject to the claims of creditors.
Another common approach is to use jointly-held assets. An asset held by two people in what's called "joint tenancy" passes by right of survivorship to the surviving joint tenant, and never forms part of the estate. (As distinct from "tenancy in common', in which your interest in the property passes to your estate.) This is something you will frequently see with real property (i.e. your house) and with bank accounts. Spouses will frequently take significant advantage of this, but when you start planning succession to children or other heirs this way, it gets tricky.
Firstly: You can put a bank account jointly into your name and the name of your child, but without a declaration (in your will or otherwise) that you intend the full benefit of the assets in the account to pass by right of survivorship to your child, then your child may be deemed to hold the assets "in trust" for your estate.
Secondly: If you have multiple beneficiaries, it's difficult to ensure an equal distribution of your estate this way.
Thirdly: Putting your house into joint tenancy with your children can be a risky venture, and might not save you money in the long run. There are a lot of potential risks. One of them is that your children will actually have an ownership interest in the house. You can't go back afterwards and say "Well, it's still my house"; you own only a partial interest in it, and your children also have ownership rights, so if the relationship breaks down, you could end up in trouble.
Even if the relationship doesn't break down with your kids, though, their ownership interest might end up subject to creditor claims, spousal interests, etc. If your son (who has an ownership interest in your house) and his wife stay at your house even briefly, then it's possible that the wife may be able to assert a matrimonial claim against the house. If your daughter gets sued successfully, then her creditors will be able to enforce the judgment as against your house.
Major risks, among others. But the benefits are good, right? You might be saving up to 1.5% of the value of the house in probate...so if the house is worth $300,000, that's $4500 you're saving. Perhaps, but there are other considerations. Firstly, there are the transaction fees of changing the title, but that's small in comparison. But there may be a larger tax burden you end up having to deal with.
Capital gains tax. There's an exemption for your principal residence. But if the house is half-owned by your child, and your child doesn't live there, then the child's half is not subject to the exemption. So you put your house into a joint tenancy between yourself and your child when you're 68 years old, and you live another 20 years. Over those 20 years, your house appreciates in value, and your child's portion of that increase will be subject to capital gains (income) tax. The appreciation could easily be a six-digit increase over that period of time. So the capital gains tax on your child's share on that could very easily exceed your probate savings.
There are other options, as well, such as inter vivos trusts. Ultimately, there are a lot of ways to plan your estate so as to improve its value and save money for your heirs. But not every idea is a good one for everyone, and your particular needs will depend on your particular circumstances. Talk to a qualified financial advisor and/or lawyer to make the most out of your estate.
*****
This Blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.
There are ways of reducing or eliminating that tax, but are to be approached with caution.
First of all, not all wills need to be probated. Some institutions will allow you to deal with assets of up to a certain value without the need for probate. (For example, each bank will have it's own cap, but for accounts under a specified amount, they will deal with the estate trustee on the basis of the will and an indemnity.) If you don't have any assets in your estate that require probate, then you don't need to probate the will and don't need to pay any probate tax.
However, if you have even one asset in a will that requires probate, all the assets to be distributed under the will are subject to probate tax.
One way of dealing with this is to create multiple wills: One for assets that won't require probate and one for assets that might. You need a lawyer for this: If framed improperly, you might end up with the second will actually revoking the first. Thus, the cost of actually making the multiple wills means that you have to really ask whether or not your savings on probate will be worthwhile; it depends on the value of the non-probate assets in the estate.
Next thing to consider in estate planning: Insurance plans with designated beneficiaries never become part of the estate. These are really helpful for the beneficiaries: The amounts aren't subject to probate, but furthermore they aren't subject to the claims of creditors.
Another common approach is to use jointly-held assets. An asset held by two people in what's called "joint tenancy" passes by right of survivorship to the surviving joint tenant, and never forms part of the estate. (As distinct from "tenancy in common', in which your interest in the property passes to your estate.) This is something you will frequently see with real property (i.e. your house) and with bank accounts. Spouses will frequently take significant advantage of this, but when you start planning succession to children or other heirs this way, it gets tricky.
Firstly: You can put a bank account jointly into your name and the name of your child, but without a declaration (in your will or otherwise) that you intend the full benefit of the assets in the account to pass by right of survivorship to your child, then your child may be deemed to hold the assets "in trust" for your estate.
Secondly: If you have multiple beneficiaries, it's difficult to ensure an equal distribution of your estate this way.
Thirdly: Putting your house into joint tenancy with your children can be a risky venture, and might not save you money in the long run. There are a lot of potential risks. One of them is that your children will actually have an ownership interest in the house. You can't go back afterwards and say "Well, it's still my house"; you own only a partial interest in it, and your children also have ownership rights, so if the relationship breaks down, you could end up in trouble.
Even if the relationship doesn't break down with your kids, though, their ownership interest might end up subject to creditor claims, spousal interests, etc. If your son (who has an ownership interest in your house) and his wife stay at your house even briefly, then it's possible that the wife may be able to assert a matrimonial claim against the house. If your daughter gets sued successfully, then her creditors will be able to enforce the judgment as against your house.
Major risks, among others. But the benefits are good, right? You might be saving up to 1.5% of the value of the house in probate...so if the house is worth $300,000, that's $4500 you're saving. Perhaps, but there are other considerations. Firstly, there are the transaction fees of changing the title, but that's small in comparison. But there may be a larger tax burden you end up having to deal with.
Capital gains tax. There's an exemption for your principal residence. But if the house is half-owned by your child, and your child doesn't live there, then the child's half is not subject to the exemption. So you put your house into a joint tenancy between yourself and your child when you're 68 years old, and you live another 20 years. Over those 20 years, your house appreciates in value, and your child's portion of that increase will be subject to capital gains (income) tax. The appreciation could easily be a six-digit increase over that period of time. So the capital gains tax on your child's share on that could very easily exceed your probate savings.
There are other options, as well, such as inter vivos trusts. Ultimately, there are a lot of ways to plan your estate so as to improve its value and save money for your heirs. But not every idea is a good one for everyone, and your particular needs will depend on your particular circumstances. Talk to a qualified financial advisor and/or lawyer to make the most out of your estate.
*****
This Blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.
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